On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act (the Act). The law includes a number of significant provisions relating to tax-exempt bonds, many of which are temporary, applying only to certain bonds issued in 2009 and 2010. Below is a general summary of the tax-exempt bond provisions in the Act.
Repeal of AMT for Private Activity Bonds
Interest on private activity bonds is no longer treated as a preference item for purposes of the alternative minimum tax, and also would not be included in the current earnings adjustment under the corporate alternative minimum tax. These amendments only apply to obligations issued in 2009 and 2010, with refunding bonds treated as issued on the issue date of the original non-refunding bonds being refinanced, except that refunding bonds issued to refund bonds issued from 2004 to 2008 will be treated as issued on their actual issue date.
Provisions Relating to Bonds held by Financial Institutions
The administrative safe harbor under which corporations generally may invest up to 2 percent of their assets in tax-exempt bonds without a portion of their interest expense deduction being disallowed under Section 265 of the Code are extended to apply to financial institutions that under current law would generally be subject to an automatic disallowance of a portion of their interest deduction in proportion to their tax-exempt bond holdings. This amendment only applies to obligations issued in 2009 and 2010, with refunding bonds treated as issued on the issue date of the original non-refunding bonds being refinanced.
The requirements for bonds to be "bank qualified" and therefore not subject to the automatic interest deduction disallowance rule for financial institution holders are modified. The $10 million annual issuance limitation on issuers of bank qualified bonds is increased to $30 million; 501(c)(3) and governmental conduit borrowers are treated as direct issuers for purposes of the qualification requirements; and individual borrowers in a pool issue are treated as if they were separate issuers for purposes of the qualification requirements. These amendments only apply to obligations issued in 2009 and 2010.
Build America Bonds
An option is provided under which an issuer may elect that any bond (other than a private activity bond) that would qualify for tax exemption under Section 103 of the Internal Revenue Code is instead issued as a taxable bond with a tax credit to the holder equal to 35 percent of the interest on the bond. Bonds issued under the option are referred to in the Act as “Build America Bonds.” The arbitrage rules apply based on the actual yield on the bonds net of the credit, and only bonds issued with not more than a de minimis amount of premium qualify for the option. The tax credits may also be stripped from the bonds under rules currently applicable to other types of tax credit bonds. This provision applies to bonds issued after the date of enactment but before January 1, 2011.
In light of the lack of tax credit appetite under current economic conditions, for a temporary period an issuer electing to issue Build America Bonds may further elect to receive direct payments from the federal government in the amount of the credit, in lieu of the credit being provided to the bondholders. This refundable credit provision also applies only to bonds issued before January 1, 2011, and is only available for issues where 100 percent of the available project proceeds (i.e., sale proceeds less up to 2 percent costs of issuance) less amounts deposited in a reasonably required fund are used for capital expenditures.
Qualified Small Issue Bonds
The definition of "manufacturing facilities" for purposes of the qualified small issue bond provisions is expanded to include facilities used in the production of certain intangible property. The scope of a "manufacturing facility" is amended to replace the 25 percent allowance for directly related and ancillary property with an unlimited allowance for functionally related and subordinate property. These provisions apply only to bonds issued in 2009 or 2010.
Tax Credit Bonds for Schools
A new category of tax credit bonds is created to finance the construction, rehabilitation, and repair of public school facilities or for the acquisition of land on which a public school facility will be constructed. These bonds may be issued in 2009 and 2010 and are subject to a national limit of $11 billion each year. There are specific requirements as to how the national limit is to be allocated among the states, with a specified portion to be allocated to certain large school districts.
Qualified Zone Academy Bonds
Authority for an additional $1.4 billion of qualified zone academy bonds in each of 2009 and 2010 is provided.
Recovery Zone Bonds
A new category of tax credit bonds, called Recovery Zone Economic Development Bonds, is created with authority for $10 billion of issuances in 2009 and 2010 to finance economic development purposes in certain designated recovery zones. In addition, a new category of taxexempt exempt facility bonds, called Recovery Zone Facility Bonds, is created with authority for $15 billion of issuances to finance depreciable property to be used in a recovery zone in the active conduct of a trade or business, subject to certain exclusions. The volume caps for these recovery zone bonds will generally be allocated on the basis of the relative declines in employment in 2008.
Tribal Economic Development Bonds
Subject to a nation-wide cap of $2 billion, Indian tribal governments are authorized to issue taxexempt bonds to finance any purpose that could be financed by a state or local government under Section 103(a), other than certain gaming facilities and facilities located outside the tribe's reservation, without regard to the "essential governmental function" requirement normally applicable to tribal bonds. The Secretary of the Treasury is directed to conduct a study of the effects of this provision and to make a report to Congress not later than one year from the date of enactment on the results of the study, including any recommendations (including whether the essential governmental function requirement should be modified or eliminated).
Clean Renewable Energy Bonds and Qualified Energy Conservation Bonds
An additional $1.6 billion of clean renewable energy bonds is authorized for certain renewable energy projects. An additional $2.4 billion of qualified energy conservation bonds is authorized to finance governmental programs and initiatives designed to reduce greenhouse gas emissions.
Davis Bacon Requirements
The Davis Bacon prevailing wage requirements generally applicable to certain contracts with the Federal government will be made applicable to projects financed with the proceeds of (i) clean renewable energy bonds, (ii) qualified energy conservation bonds, (iii) qualified zone academy bonds, (iv) qualified school construction bonds, and (v) recovery zone economic developments bonds. This provision generally applies in the case of bonds issued after the date of enactment.